This article discusses nine methods through which farmers may obtain the capital used in their farming businesses. These methods are categorized into internal and external sources.

The internal sources include inheritance, gifts, savings, and family arrangements, while the external sources encompass incorporation, leasing, purchase contracts, vertical integration, and borrowing. This article focuses on the internal sources of agricultural finance.

1. Inheritance

In Nigeria, the land tenure system plays a significant role in how land is passed down through generations via inheritance. Sons typically inherit land cultivated by their parents, and this practice continues across generations.

As families grow, the available land is often divided among multiple children, leading to increased fragmentation. In subsistence farming communities, approximately 90% of land ownership is achieved through inheritance.

2. Gifts

Land ownership can also occur through gifts exchanged between families, friends, or relatives, such as from a mother to her son. This method is particularly common in subsistence farming scenarios.

3. Savings

Internal Methods of Acquiring Agricultural Finance

Savings, defined as net worth minus gifts and inheritance, form the foundation of a farm’s financial structure. Savings not only provide capital but also enhance risk-bearing ability and demonstrate the capacity to earn and save, which are crucial for a strong credit rating.

Farming is a capital-intensive business requiring a solid financial foundation, which savings can provide. Successful commercial farmers are often those who can save effectively. Farmers must bear the risks of loss, and savings are also essential for covering expenses such as healthcare, education, and other family needs.

Accumulating savings takes time, especially as living standards tend to rise with income, leaving little room for saving. However, wisely invested savings can grow significantly over time. For instance, saving ₦500 weekly can grow to ₦305,000 in ten years at a 3% interest rate and to ₦327,000 at a 5% interest rate.

Attitudes of Farmers towards Savings

Farmers save a substantial portion of their income, often more than other occupational groups in developed economies. Much of this saving is “forced” by the nature of farming, which requires significant capital for success. This necessity compels farm families to save, often leading to the adage that farmers “live poor but die rich.”

Recommendations are sometimes made to provide larger loans to farmers to reduce the need for such extensive saving. However, even well-established farmers continue to save, indicating a strong cultural and practical inclination towards saving.

Younger farmers tend to allocate more income to farm investments, while older farmers may prioritize consumption. Family cycles significantly influence these saving behaviors.

Family Arrangements

Family arrangements are crucial for acquiring farm capital, especially for beginning farmers. Parents or family members often provide gifts or loans to help new farmers establish their operations. Formal agreements, such as father-son partnerships and rental arrangements, are also common.

The importance of family agreements is growing, particularly with the extension of Social Security benefits to farmers in countries like the United States.

These benefits encourage older farmers to reduce their farming activities, making family arrangements more frequent. As farms become larger and fewer, beginners increasingly rely on family assistance to start their operations.

1. Father-and-Son Agreements

Father-and-son agreements are the most common family arrangements. They allow a son or son-in-law with limited capital to gradually enter the farming business. For the father, this arrangement can reduce manual labor and help maintain a profitable business.

For the younger generation, it provides an opportunity to start farming with less capital and gain valuable experience and management skills.

2. Essentials of Successful Family Partnerships

Successful family partnerships require several key elements:

i. Desire to Farm: Both the son and his wife must have a genuine interest in farming.

ii. Satisfactory Living Conditions: Separate living accommodations can reduce friction and promote harmony.

iii. Ability to Get Along: Mutual respect and understanding between generations are crucial.

iv. Belief in Partnership: All parties should believe that the partnership will lead to better progress and happiness.

v. Adequate Farm Size: The farm must be large enough to support both families.

vi. Good Farm Management: Effective management practices are essential for success.

vii. Knowledge of Farming: The son should have a good understanding of farming and the specific farm business.

viii. Good Business Judgment: Avoiding excessive risks and seeking elder counsel in financial matters is important.

ix. Partnership in Entire Business: All partners should be involved in the entire farm enterprise.

x. Good Partnership Agreement: A well-drafted, written agreement can prevent misunderstandings.

Legal Aspects of Partnerships

Partnerships involve significant legal responsibilities. Each partner is liable for the actions of the others, including selling property, making contracts, and incurring debts. In father-and-son partnerships, these issues are usually minor, but it is important to prepare for potential difficulties.

Laws governing partnerships vary by state, so it is advisable to consult a qualified attorney to draft a partnership agreement that includes proper safeguards. Adequate insurance should also be in place to cover liability claims.

The death of a partner automatically terminates the partnership, so the agreement should include provisions for dissolving the partnership in such an event.

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